Enterprises that have submitted a profit and loss statement to the tax service with a loss may receive a notification requesting an explanation of the reasons for its formation. Otherwise, if the taxpayer fails to provide the necessary information, the tax inspectorate may decide to conduct an on-site audit or, in extreme cases, liquidate the legal entity. It is not recommended to ignore such a “sign of attention”. This article will discuss in detail how to write explanations to the tax office regarding losses. A sample will be given at the end of the article.
How to behave?
and it’s no secret that not a single chief accountant wants his company to be included in the list of “lucky ones” for conducting on-site events to audit financial and economic activities by tax authorities. But what should he do if the annual report turns out to be a loss, and the tax inspectorate demands to explain the reasons for its occurrence?
In this situation, there are two options for behavior:
- leave the annual report as is, but at the same time you need to competently and convincingly write explanations for the company’s losses;
- artificially correct reporting in such a way that unprofitability ultimately “disappears.”
Having chosen one option or another, you must understand what tax risks you can expect and what consequences they can bring for the company.
If you have at your disposal all the properly completed documentation that can confirm the validity of the expenses incurred, then there is no need to artificially adjust the reporting, i.e., there is no need to remove the company’s losses, since they will be lost to you forever. In such a situation, it would be more appropriate if you prepare an explanation for the losses to the tax office. We will consider a sample of such an explanatory note below.
But sometimes it is not possible to explain the reasons for the occurrence of a negative balance. Then you can correctly correct the profit and loss statement and thereby hide the loss. But you must understand that deliberate distortion of reporting may result in fines for the company. It would be better if, before submitting your reports to the tax office, you look at them again to see if you have taken into account all the income.
What criteria are used to consider companies that have shown a loss?
Typically, there are three types of losses:
- a fairly large loss;
- the loss is repeated over two tax periods;
- the loss was shown last year and in the interim quarters of the current year.
What should newly registered enterprises do? Loss is a common occurrence for new businesses. In addition, tax legislation requires accounting for expenses in the period in which they are incurred, despite the fact that income has not yet been received. If a company was created and suffered a loss during the same year, then the tax authorities most likely will not consider it as problematic.
However, if you show a loss for more than one year, the inspectorate will require you to explain the reasons for this situation, since it may consider that you are deliberately reducing profits. Therefore, we recommend that if you have a loss, submit a balance sheet and profit and loss statement with an explanatory note, this will allow you to avoid unnecessary questions.
What does a loss declaration mean?
This means that at the end of the year, instead of profit, a tax loss was formed, as a result of which there will be no income tax indicator for payment. Tax loss is the negative difference between income and expenses that are taken into account for tax purposes.
The task of the Federal Tax Service is to ensure the modern calculation of taxes and the flow of funds into the budget. The Federal Tax Service is often overly attentive to companies operating in the red. For tax authorities, losses are a sign of a number of illegal actions of the director - tax evasion, withdrawal of assets, deliberate bankruptcy, fraud, etc.
What indicators do tax authorities pay attention to when auditing an unprofitable company?
- On the ratio of debt and equity capital. It is considered acceptable if the amount of equity capital is greater than borrowed capital. In this case, it will be better if the growth rate of borrowed capital is lower.
- On the growth rate of current assets. It is considered normal if this indicator is greater than the growth rate of non-current assets.
- On the growth rate of accounts receivable and accounts payable. These indicators should be almost the same. Tax officials may be interested in the reason for the increase or decrease in these indicators.
What should an explanatory note about losses look like?
How to write an explanation to the tax office? There is no standard form as such; explanations are written in free form on the official letterhead of the enterprise and signed by the manager. The note is drawn up in the name of the head of the tax office, which sent a request for clarification of losses.
The main emphasis in the letter should be on explaining the reasons for the negative financial result. Here it is very important to back up all words with facts that influenced the emergence of a situation where the enterprise’s expenses exceeded its income. It is very good if the company has documents that can be used to confirm that this is normal business activity aimed at making a profit, and there will be no losses in the next reporting period. To prove that you have taken a number of steps to achieve positive results, you can attach a copy of the business plan, a breakdown of accounts payable and other similar tools to the explanatory note.
The procedure for recognizing a tax loss for organizations on the OSN
As mentioned above, when calculating income tax, losses for previous periods can be taken into account. A company can take into account a loss only if it makes a profit. If there is no profit, the loss is carried forward to a later period. At the same time, to account for the loss, you do not need to wait until the end of the year; it can also be taken into account based on the results of the reporting periods.
IMPORTANT! If losses were received based on the results of not one year, but several, then they are taken into account according to the chronology of occurrence.
From the beginning of 2022, the procedure for recognizing tax losses when calculating income tax has been changed. So, starting from 01/01/2017 and until 12/31/2021, the company can take into account losses for previous periods in such a way that the positive annual result obtained is not reduced by more than 50% due to the carry-forward loss. Previously there was no such restriction. At the same time, there are companies that can continue to take into account the loss in a larger amount without adhering to the 50% limit. This benefit is available to companies with reduced tax rates specified in Art. 284 Tax Code of the Russian Federation.
There is also a positive aspect in the innovations: previously, losses could be carried forward for up to 10 years, but now this restriction has been removed for special purpose assets. The new rules apply to losses incurred by the company since 2007.
Find out how to correctly reflect the carry forward of losses to future periods in your income tax return in the Typical Situation from ConsultantPlus. Learn the material by getting trial access to the system for free.
Explanation 1. Reduction in prices for goods, works and services sold
The reasons for this decrease may be the following factors.
1. The selling price is reduced due to a decrease in market prices or a decline in demand. The consumer will not buy a product with a price higher than the market price, and by selling it at a loss, you can get at least some revenue and not go into an even greater loss. This explanation can be supported by the following documents:
- by order of the manager on the establishment of new prices and the reasons for such changes;
- a report from the marketing department, which will reflect the market situation and provide an analysis of the decline in demand for goods shipped by the enterprise.
2. Product expiration date expires. To prove this reason, you can attach the following documents:
- act of the inventory commission;
- an order from the manager to reduce prices for goods.
3. Buyer's refusal to order. You can justify this reason by attaching an agreement to terminate the contract or an official letter from the buyer in which he writes about his refusal.
4. Seasonal nature of goods, works and services sold. Seasonal fluctuations in demand are typical for such areas as construction, tourism, etc. To justify this reason, you will also need an order from the manager to reduce prices.
5. The price reduction is explained by the development of a new sales market. At the same time, your arsenal should include marketing research, plans, and development strategies. It will not be superfluous if you provide copies of supply contracts to new points of sale or documents for opening a new division in another region.
Sample explanatory note
For a clear understanding of how to write explanations to the tax office regarding losses, the sample presented below will help us.
To the boss
Inspectorate of the Federal Tax Service of Russia No. 6
in Kazan
Skvortsov A.S.
EXPLANATIONS
Having studied your request regarding the provision of explanations explaining the formation of the loss, Romashka LLC reports the following.
During nine months of 2014, the revenue of Romashka LLC from the sale of products amounted to 465 thousand rubles.
Costs taken into account in tax accounting amounted to 665 thousand rubles, including:
- material costs – 265 thousand rubles.
- labor costs – 200 thousand rubles.
- other expenses – 200 thousand rubles.
Compared to the same period last year, these costs increased by 15 percent, including:
- material costs – by 10%;
- labor costs – by 4%;
- other expenses – by 1%.
From these indicators it is clear that the increase in the company’s expenses was mainly associated with an increase in prices for materials and raw materials necessary for the production of our products. In addition, it is worth noting that the company, in order to motivate its employees, increased wage costs.
Also, due to the market situation and the level of competition, the Company was unable to implement the planned increase in prices for the goods sold.
In connection with the above, it can be argued that the loss is a consequence of objective reasons.
Next, you can include a description of the further development of the enterprise in the explanations for tax losses. An example of such a description:
Currently, the management of the enterprise is already conducting negotiations, the purpose of which is to attract new buyers and customers, and is also considering the issue of improving the products, which will increase the income of the enterprise several times. The company plans to achieve a positive financial result based on the results of 2015.
Blog
When conducting a desk audit, the tax office may request documents, explanations or clarifications in the submitted report.
Each request has its own response time frame.
If you have requested documents, respond within 10 days. If you do not have time to prepare the documents, you need to send a notification to the inspectorate indicating the reason for the delay and the specific date for fulfilling the requirement.
If tax authorities require clarification or clarification, you must respond within five days. There is no deferment for such requests. For late execution of a request - a fine of 5,000 rubles. For a repeated violation within a calendar year - another 20,000 rubles, and for each document not submitted - 200 rubles.
Service checks the income tax return indicators with:
- VAT declaration,
- accounting reports,
- statements of current accounts.
If discrepancies are found, a demand may come (you will need to give an explanation or make changes to the declaration.
The tax office also sends a request if a return is filed that reflects a loss.
Related course
Advanced accountant
Find out more
Example 1 :
EXPLANATORY NOTE
on the causes of losses reflected in the income tax return
in a year
LLC "A" was registered on "Date"
The main activity of LLC “A” is “Type of activity”.
Financial and economic analysis of the company’s activities for __ year showed that
the reasons for the losses incurred are temporary and related to the start of activities
organization, low income and high costs.
The reason for the small revenue volumes for this period is the low demand for the organization’s products due to buyers’ lack of knowledge of our brand.
High costs during this period were associated with advertising and the marketing policy pursued to develop this market.
As confirmation, we present the structure of the company’s income and expenses for ____ Year
Attach the structure in rubles.
In order to stabilize financial and economic activities and obtain a positive financial result, the following decision was made:
1. review the company’s marketing policy;
2. review the pricing policy for products sold;
3. expand the number of partners selling products to consumers.
Example 2:
Explanations in case the figures in the income tax return differ from the data in other reports
Response to requirement
for the provision of explanations, LLC “A” received a request to provide explanations about the reasons for the discrepancies in income in the corporate income tax return for the _______ year and in the statement of financial results.
There are no errors in the reporting. Discrepancy _________ rub. - this is the amount that the organization received from the sole founder. When determining the tax base for income tax, such income is not taken into account (subclause 11, clause 1, article 251 of the Tax Code of the Russian Federation). And in the financial results statement this amount is reflected in line 2340 “Other income”.
We enclose a transcript of this line.
Example 3:
Explanations from the Federal Tax Service: why revenue in VAT and income tax returns is different
Response to request for clarification
LLC “A” received a requirement to provide explanations about the reasons for the discrepancies in income in the VAT return for the first quarter of 2022 and in the corporate income tax return for the first quarter of 2020.
There are no errors in the declarations. Discrepancy ________ rub. – this is non-operating income, which was taken into account in the income tax return on line 100 of Appendix 1 to Sheet 02,
including: – ____ rub. – interest on the loan (clause 6 of Article 250 of the Tax Code);
- _____ rub. – the amount of overdue accounts payable including VAT (clause 18 of Article 250 of the Tax Code of the Russian Federation). These amounts are not included in the VAT tax base on the basis of paragraph 3 of Article 149 and paragraph 1 of Article 146 of the Tax Code of the Russian Federation.
Encyclopedia ProfiRost, 02.09.2020
Information on the page is searched for by the following queries: Accountant courses in Krasnoyarsk, Accounting courses in Krasnoyarsk, Accountant courses for beginners, 1C: Accounting courses, Distance learning, Accountant training, Training courses Salaries and personnel, Advanced training for accountants, Accounting for beginners, tax issues , Accounting services, answers to requirements
Explanatory note on taxes
Currently, businesses may be required to provide an explanation to the tax office regarding VAT. This is the case if, when sending them an updated declaration, the amount of tax payments is less than that indicated in the original version.
The explanation for VAT, as well as the explanation for losses to the tax office, is drawn up in any form and supported by the signature of the head of the organization. It indicates the indicators that have changed in the declaration, which became the reason for reducing the tax amount. Among other things, it would not be superfluous to indicate the reason why different information was indicated in the original declaration. This may be an error in calculation due to misunderstanding of legislation or program failure and other similar factors.
Grounds for requesting clarification during a desk audit of an income tax return
The income tax return is subject to a desk audit for each fact of its submission, but the requirement to provide explanations does not always mean that errors are identified.
The general procedure for conducting desk audits is regulated by Art. 88 Tax Code of the Russian Federation. A desk (documentary) audit is carried out upon the submission by taxpayers of declarations, calculations and other documents necessary to verify the accuracy of the declared information.
In relation to income tax, such a document is a declaration, which the taxpayer is required to submit quarterly. The deadline for submitting the declaration is no later than 28 days from the end of the reporting period.
ConsultantPlus experts explained what you need to know if the tax office has asked for clarification on your income tax return. Get trial access to the system and go to Review from K+ for free.
Read more about the procedure for filling out and submitting an income tax return on our website, in the materials in the “Income Tax Return” section.
In paragraph 3 of Art. 88 of the Tax Code of the Russian Federation provides an exhaustive list of grounds under which tax officials may send a requirement to provide explanations regarding the information contained in the declaration, or to make amendments within the time period specified in the requirement. Such grounds may be:
- identified errors in the income tax return;
- contradictions established by the tax authority during the reconciliation of submitted documents;
- reflection of losses in reporting;
- submitting a clarification with a reduction in the amount to be transferred to the budget;
- discrepancy between the data provided by the taxpayer and the information contained in other documents available to the tax inspectorate and received as a result of control activities.
These grounds cover an almost complete list of claims that the tax authorities may present to the declarant during a desk audit.
In relation to the audited income tax return, the situation for almost guaranteed submission of a request for explanations is an indication of losses based on the results of the reporting period. The absence of a taxable base, and especially if it is recorded based on the results of several consecutive reporting periods, raises reasonable doubts among the inspection authorities and almost inevitably leads to the need to provide explanations.
